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Bank of America -- Expect the Unexpected: Street Whispers

Updated to include Moody's comments in the 13th graph.

NEW YORK ( TheStreet) -- Bank of America's (BAC - Get Report) surprise $2.43 billion shareholder settlement on its crisis-time acquisition of Merrill Lynch on Friday is the next in a string of unexpected billion dollar losses and wrecked quarters. Investors should continue to expect negative surprises as the bank and its chief executive Brian Moynihan struggle to move past the crisis.

In fact, Friday's larger than expected legal settlement and an expected hit to Bank of America's third quarter earnings and capital levels give investors a clear signal why the bank's shares aren't expected to recover materially from the crisis anytime soon.

The loss -- combined with the steep discount that Bank of America trades relative to its liquidation value -- highlight a future unexpected surprises that could legal settlements, writedowns or provisions against future liabilities. Until investors have numerical certainty on Bank of America's various exposures, some analysts see little reason for shares to recover substantially.

Jim Sinegal, a large cap bank analyst with Morningstar, sees Bank of America's larger than provisioned for Friday shareholder settlement as yet another reason why legal issues stemming from the crisis will take a long time to resolve and will depress the bank's normalized earnings outlook and share prices for quarters to come.

"It's something that has been hanging over the stock for a long time and I don't think that's going to change anytime soon," says Sinegal of future legal costs, highlighted by the bank's ongoing litigation over mortgage securities with Fannie Mae and Freddie Mac. "The stock really doesn't recover until it's behind them," he adds.

Because Friday's settlement over Merrill Lynch came in roughly $1.2 billion more than Bank of America had provisioned for, the bank will wipe out roughly six months of progress on capital and depress overall 2012 profitability while cutting 28 cents from the Bank of America's third-quarter earnings. Both KBW and Wells Fargo analysts now forecast the bank will post a loss for the third quarter.

Earnings excluding charges, litigation and the improvement in its credit spreads, earnings may range between 15 cents and 30 cents, respectively, analysts said.

"The $2.4 billion settlement came in higher than expected as some part of [the third quarter's] $1.6 billion in litigation expense comes from an additional BAC/MER case accrual," wrote KBW analyst Jefferson Harralson, in a Friday note to clients. "We are left to guess that the case was settled for $0.8 to $1.2 billion more than what had been accrued," he added.

Although Bank of America shares are up nearly 60% year-to-date, the top performer on the Dow Jones Industrial Average those gains represent a recovery from post-crisis lows hit in 2011 and still keep the bank's shares at half of post-crisis highs near $20 a share hit in 2010.
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